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New vistas and demand revival to propel growth

Industrial consumable market is well set to witness strong growth given the overall broad revival expected in most end-user industries. Auto and auto ancillaries (~25% of demand), and construction and industrial consumption are in a recovery mode. The recent government policy towards Atmanirbhar will be a shot in the arm for domestic organised consumable manufacturers. Focus on value addition and new innovative segments under engineered ceramics and plastics are likely to support margins. We initiate coverage on: 1) Carborundum Universal with a BUY rating assigning an SoTP-based target price of Rs660, and 2) Grindwell Norton also with a BUY rating and SoTP-based target price of Rs990.

* Strong impetus towards government investments will support growth: The government’s current emphasis towards capex is likely to crank up demand for the industrial consumable market. Nominal GDP growth is poised to recover to 14-15% in FY22E and this will drive recovery in inter alia automobile and auto ancillary, construction and industrial demand. The government’s policy stance to discourage Chinese imports and support local manufacturing may also support market share increase for the organised players.

* New applications and value-added products will support ceramic growth: Ceramics have found applications in new segments apart from its conventional use in general wear resistance. Engineered ceramics such as metallised cylinders, injection moulding and 3D applications are expected to gain traction. Specialised applications in electric vehicles, electronics and mobile manufacturing also open interesting vistas of growth.

* Plastics and specialised electrominerals to fuel futuristic applications: Plastics is a new area of growth where there can be several specialised applications under pharma, chemicals and healthcare industries. In electrominerals, apart from commoditised products such as silicon carbide and alumina, new specialised minerals like graphene, etc. will aid margin improvement and higher RoI.

* New growth vistas and demand revival to fuel growth: Recovery in factory utilisation, increase in auto production, and greenfield investments under electronics, consumer durables and electric vehicles will fuel growth for industrial consumables. There are exciting opportunities in engineered ceramics, plastics and electrominerals. The low-cost manufacturing expertise by Indian companies will also aid in improving export traction. Hence, we believe, this is the right time to play the industrial consumable sector due to secular demand outlook. Given the strong growth prospects, we initiate coverage on Carborundum Universal and Grindwell Norton with a BUY rating on both.

* Reverse DCF provides valuation comfort: As per our reverse DCF exercise, the current market price of Carborundum discounts growth at 14.5% and EBITDA at 13.7% CAGR for next 20 years. For Grindwell, the reverse DCF discounts growth at 15% and EBITDA at 14.5% CAGR for the next 20 years.

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